China’s Stimulus Package: Increased Money for Railways (Part II)
The Chinese always speak of three legs to their country’s economic stool: exports; government spending and domestic consumption. Everyone expects China’s exports to the developed economies of the world to slow dramatically in 2009 as these economies struggle in the aftermath of the financial crisis. Though China may find new or expanded export markets in the emerging economies of the world,
it’s a pretty safe bet that exports will not be the engine of growth that they have been in recent years. China must, therefore, look to increased government spending and domestic consumption to pick up the slack.
China’s 4 trillion yuan ($586 billion) stimulus package announced earlier this week was designed to do two things: provide real, additional stimulus to the economy and shore up consumer confidence. In order for consumers to keep buying television sets and cars, they need to believe that the whole world, including China, is not coming apart at the seams. A sense that this is the case is having a chilling impact on business activity across all sectors of the China economy in the fourth quarter. That is why the government believed it had to announce that bold measures were being taken, and it had to announce them quickly.
The headline number of “4 Trillion Yuan” is eye-catching, but most China observers recognize that some of this was already built into the budget: disaster relief for earthquake victims for one, infrastructure spending that was already planned for another. China operates according to a five year planning process and is now in the middle of the country’s 11th Five Year Plan (2006 to 2010). Typically, spending is at its peak during a plan’s second, third and fourth years. Because 2008 is the third year of the current plan, and 2009 is the fourth, we would normally expect to see a high level of infrastructure spending during these years. What analysts want to know, and have had trouble finding out, is: “How much of the 4 trillion yuan is extra?” As we learn of these differences, we will pass them along to MTD readers.
Perhaps the biggest difference between what was announced and what was already planned lies in the amount of money China is now allocating to railway construction. China’s railway ministry has promised to invest quickly and aggressively to help execute the government’s economic stimulus package. The Ministry of Railways plans to invest 600 billion yuan in 2009, up from 350 billion yuan this year, a figure that has been increased from the original target of 300 billion, according to Yang Zhongming, the head of the ministry’s planning department. “The scale of construction and size of investment will be unprecedented in China’s railway history,” Yang told the official People’s Daily newspaper.
At present, there are 150 major railway projects under construction throughout China, and the total investment in these projects has exceeded 12 trillion yuan. By the end of 2007, China had 78,000 kilometers of railways. Over the next three years, twenty-three new projects, totaling an additional 8,900 kilometers of mostly high speed railways, will be completed. Since the beginning of October, construction has begun on eleven primary railway projects.
What does all this mean? More production and jobs for sure. Yang Zhingmoing said that next year’s capital spending would eventually boost gross domestic product growth by 1.5 percentage points and create 6 million jobs. It would consume 20 million tons of steel and 120 million tons of cement, he added.
Taking into account the recent railway announcements, Kate Zhu, a Vice President in Morgan Stanley Research, projects that total railway investment by China in its 11th Five-Year Plan will reach 2 trillion yuan, versus the original plan of 1.25 trillion yuan, a whopping 60% increase. If Kate is right, then additional railway construction expenditures alone will account for 750 million yuan ($110 billion) of the 4 trillion ($586 billion) stimulus package.
